Short-selling threats and bank risk-taking: Evidence from the financial crisis

The focus of this paper is whether the Securities and Exchange Commission's Regulation SHO strengthens or weakens the effect of short-selling threats on banks' risk-taking. The evidence shows that pilot banks with looser constraints on short-selling increased their risk-taking during the financial crisis of 2007- 2009. The reason is that short-selling threats improved the information environment and mitigated the agency problems of banks during the pilot program that led to greater risk-taking by pilot banks. Addi-tionally, this effect is mainly driven by pilot banks with poor corporate governance, or high information asymmetry. Overall, our paper provides novel evidence that the disciplinary role of short-sellers had a positive effect on bank risk-taking during the financial crisis.(c) 2023 Elsevier B.V. All rights reserved.